The World’s Next ‘Big Trade’

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Wow. There’s no other way to describe the amount of money the latest Hollywood blockbuster is raking in. Avengers: Endgame has already made US$1.2 billion in the first week.

I find superhero films like this mind-crushingly boring. But shareholders in The Walt Disney Company [NYSE:DIS] don’t mind. The stock has flown up nearly 20% in the last couple of weeks. That’s a big move for a company this size.

Part of this lift is the market pricing in the imminent launch of Disney’s streaming service, pegged for November this year.

I can offer some expertise on this content. My daughter watches Disney movies all the time. It’s a cracking back catalogue — and there’s plenty coming up.

But it does make you wonder the effect it will have on the wider market. Here’s why I bring it up specifically. The fabled FAANG trade (Facebook, Amazon, Apple, Netflix and Google) is running into all sorts of trouble.

Netflix obviously now has a very powerful competitor coming for it in an already crowded field. And Netflix is already spending billions to offer unique content. This is forcing it to raise prices.

That’s not all. Much of Netflix’s catalogue does not belong to the company. It merely licenses the rights to broadcast it. Netflix was able to lock in Friends, for example, back in the days when the major studios didn’t perceive Netflix as a threat.

(People really love Friends despite the fact it’s now ancient. I used to work in a hostel many years ago that had a massive library of VHS tapes (yes, those clunky old things). All the classic movies were there. It didn’t matter. 90% of the time, it was Friends on the TV.)

Netflix’s current competitive advantage from old shows like Friends could be eroded the more companies like Disney bring their content back home to offer their own streaming services or competitive bundles.

That would make Netflix much less appealing as a cheap, low-cost way to access a huge library of content.

You can take it or not as a subscriber. That’s one thing. But it’s as far as Wall Street is concerned that preoccupies us today. The outlook for Netflix is decidedly murkier from here.

US tech stocks hit turbulence

That’s not all when it comes to the FAANGs. Google’s parent company is now called Alphabet Inc. [NASDAQ:GOOG]. It released its latest results in the US while you and I were snoozing.

They were disappointing. Competition seems to be eroding some of its advertising dominance. We’ll keep monitoring this. But the revenue target missed for the quarter.

Earnings per share also took a hit from the 1.5 billion euro fine the company paid. There might be more costs like these to wrestle. Alphabet’s competitors are going after it.

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And then we have Facebook. In its latest results, Mark Zuckerberg’s behemoth announced that it’s setting aside US$3 billion for a fine it expects to pay. It may not be the last one either.

Why dwell on all this? US technology stocks have been a major component of the US bull market since 2009.

It also begs the question of where fund managers go if they can’t find growth from these names.

One idea might be a rotation from US technology to Chinese technology.

Consider that there are significant calls for US tech stocks to be further regulated because of the way they monetise user data and distribute content. That’s a threat to their earnings.

In an ironic twist, you’re more likely to see the major US technology companies regulated than their Chinese counterparts.

That means a fund manager can get the same growth profile of massive technology companies with less risk on the regulation front.

The world’s next big trade?

It’s not as if the Chinese middle class is going to disappear. In fact, it’s going to get a whole lot bigger over the next 10 years.

I’ve made the case for a stock like Alibaba [NYSE:BABA] for a while. Any demise in the FAANG trade just makes it more compelling than it already is.

Naturally, getting exposure to a Chinese company so dependent on the Chinese economy brings up the inevitable risk that China goes down in a big way. But you could worry about that for a long time.

I know of one analyst who has warned on China for about 20 years. There’s been a lot of wealth created there for a long time while he’s sat out of the market.

I take a different view to most. I think China’s weakness is oil, not debt. It’s the largest importer in the world and domestic production is flat at best. A sharply rising oil price could hurt the consumer base that Alibaba is trying to monetise.

One way you could think about trading a dynamic like this is to buy Alibaba and get some exposure to oil at the same time, as a hedge.

No investment lives in a vacuum. To go back to the start of our discussion, the same dynamic that’s driving up Disney’s stock price is arguably hurting that of Netflix.

It’s fine to try and monetise the growth of the Chinese economy…but keep an eye on what could bring it down, too. I suggest you do that here.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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